In nearly two centuries of operation, Lord & Taylor has survived a lot. However, the oldest department store chain in the U.S. -- tracing its lineage to a dry goods store that opened in New York City in 1826 -- was already on death's doorstep a year ago. By that time, Lord & Taylor was experiencing steady sales declines, and earnings before interest, taxes, depreciation, and amortization (EBITDA) had turned negative. As a result, former parent Hudson's Bay effectively paid fashion rental start-up Le Tote to take Lord & Taylor off its hands.

The Le Tote-Lord & Taylor tie-up always seemed like a long shot at best. The COVID-19 pandemic made the odds insurmountable. As a result, after filing for bankruptcy protection a month ago, Lord & Taylor announced last week that it has started liquidation sales at all of its stores.

Calling it quits

When Lord & Taylor and Le Tote filed for bankruptcy protection in early August, they announced plans to close half of Lord & Taylor's 38 stores. About two weeks ago, the department store chain added another five stores to its downsizing plans. This would have left it with just 14 stores, mostly in the New York metro area. Of the 14 stores that would have remained, seven occupy off-mall locations.

However, while these 14 individual stores may have been decently profitable in recent years, shrinking the store fleet so radically would have made it very hard for Lord & Taylor to cover its overhead costs. The lack of scale also would have made it challenging to craft a competitive digital strategy.

The parking lot and exterior of a Lord & Taylor store

Lord & Taylor's Eastchester, New York store was one of 14 locations the chain had hoped to keep open. Image source: Author.

Of course, Lord & Taylor also faced a huge near-term challenge. Dresses and other dressy items were historically its biggest strength, but the pandemic has crushed demand for this segment of the apparel market. Demand for dressy clothing could remain depressed for another year or more.

Lord & Taylor bowed to the inevitable last week, announcing that it will begin liquidating all of its stores. An acquirer could still potentially ride to the rescue in the next few weeks, but it's not a likely outcome. Instead, Lord & Taylor will probably wind up its liquidation sales and shut down its e-commerce site before the end of 2020.

An opportunity for rivals, especially Macy's

Assuming Lord & Taylor does close all of its stores, it will further thin out the competition in the department store space. That will create an opportunity for rivals to gain market share.

Macy's (M -7.72%) has by far the best shot at picking up business from Lord & Taylor. Both department store chains are strongest in the Northeast, and the Macy's brand also has a more premium positioning in that region than in many other parts of the country. There's huge store overlap between Macy's and Lord & Taylor. Of Lord & Taylor's 38 stores, 25 are in malls that also have a Macy's store. Most of the other 13 are in close proximity to one or more Macy's locations.

Macy's can also target Lord & Taylor's wealthier customers with its Bloomingdale's luxury chain. More than a dozen of Lord & Taylor's stores are within 10 miles of a Bloomingdale's.

Lord & Taylor's annual revenue was just $1 billion as of 2018 and has declined since then due to store closures and poor business performance. For comparison, Macy's net sales totaled $24.6 billion last year and analysts expect over $17 billion of revenue in 2020 despite the massive impact of the pandemic. Clearly, the Lord & Taylor liquidation won't be a panacea for Macy's. Still, every bit will help as Macy's tries to recover from the disruption of COVID-19.

Who's next?

While department stores have been some of the primary victims of the retail apocalypse, there were no major department store liquidations until recently. However, Bon-Ton liquidated in 2018, luxury chain Barneys New York followed in 2019, and Lord & Taylor looks set to close up shop in 2020.

The department store shake-out won't end there. Sears survived its late-2018 bankruptcy filing, but its turnaround effort has (unsurprisingly) been a colossal failure. The chain may be on its last legs. J.C. Penney filed for bankruptcy protection earlier this year, and so far, efforts to sell the business have come up short. While the company's lenders plan to take control of J.C. Penney, its survival is far from assured. Regional chains like Belk and Boscov's could be at risk in the years ahead, too. Even luxury retail titan Neiman Marcus looks vulnerable, as it has steadily added locations to its store closing list since filing for bankruptcy protection several months ago.

Thus, there will be plenty of market share up for grabs in the next few years. The real question is whether Macy's or any other department store chains have what it takes to capitalize on this emerging opportunity.